Friday May 31st

U.S. stock index futures tanked on Friday morning, as investors feared President Donald Trump’s surprise threat of tariffs on all Mexico imports, amid a worsening trade war with China, could risk sending the U.S. economy into a recession. Around 8:25 a.m. ET, Dow Jones Industrial Average futures indicated a drop of 270 points at the open. Futures on the S&P 500 and Nasdaq dropped by more than 1% each. The S&P 500 was already down 5.3% this month through Thursday after trade talks fell apart with China and rhetoric on both sides worsened in May. “President Trump’s latest trade bombshell … might turn out to be a short-lived threat that is quickly defused by commitments on border security, but it nonetheless looks damaging at a number of levels,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, wrote in a note. “At the big picture level, it suggests that Trump trade policy might well mean a permanent state of endemic uncertainty and instability in the global trading system not simply a hard-headed sequential re-set of prior arrangements that started with Mexico and proceeds via China to Europe and Japan.” Shares of GM dropped more than 5% in premarket trading. Ford lost 4%. Both have significant production in Mexico that could be subject to tariffs. Shares of railroads Kansas City Southern and Union Pacific also fell. Fiat Chrysler traded 5.4% lower. Corona and Modelo beer maker Constellation Brands slid 6.6%  and was headed for its worst day since Jan. 9, when it lost 12.4%. The closely watched 10-year Treasury yield dropped to lows not seen since 2017. The U.S. benchmark was yielding 2.17% Friday morning. It was above 2.5% at the beginning of the month. Mexico’s currency, the peso, tanked against the dollar by more than 2% to trade at 19.6 per dollar. On Thursday evening, Trump announced the U.S. would impose a 5% tariff on all Mexican imports from June 10 until illegal immigration across the southern border was stopped. The White House added in a statement that tariffs would be raised if the immigration issue persisted, with the charges set to increase even further if Mexico fails to take “dramatic action” to reduce or eliminate the problem. Mexico is one of the U.S. largest trade partners. The U.S. imports every year billions of dollars worth of of chemicals, transportation equipment and other goods from Mexico. The news regarding U.S. tariffs on Mexican goods comes as the U.S. tries to work out a trade deal with China. Washington and Beijing have imposed tariffs on billions of dollars’ worth of one another’s goods since the start of 2018, battering financial markets and souring business and consumer sentiment. Earlier this month, the two countries hiked tariffs on their goods, sparking a sell-off in equities. The “worst case scenario is foreign governments (China/Mexico) simply wait Trump out given we’re 19 months from an election,” wrote Tom Essaye of The Sevens Report. ” In that outcome, there is no China trade deal and tariffs (Chinese and Mexican) act as an anchor on global growth and market sentiment for 18 months, increasing the chances of a recession.” The biggest Chinese newspaper explicitly warned the U.S. on Wednesday that China would be prepared to cut off rare earth minerals as a countermeasure. Chinese Vice Foreign Minister Zhang Hanhui then said Thursday that provoking trade disputes amounted to “naked economic terrorism. ” Not helping things, the trade war appears to be dragging down the Chinese economy. The country’s manufacturing activity contracted more than expected in the month of May, China government data out overnight showed. The official manufacturing Purchasing Managers’ Index (PMI) for May was 49.4, down from April’s reading of 50.1. PMI readings below 50 signal contraction. Stocks in Asia were mixed on Friday as China’s manufacturing data fell below analysts’ expectations. Japan’s Nikkei 225 slipped 1.63% to close at 20,601.19, while the Topix index also dropped 1.29% to finish its trading day at 1,512.28. Mainland Chinese stocks were lower on the day, with the Shenzhen component slipping 0.23% to 8,922.69 and the Shanghai composite was declining 0.24% to 2,898.70. The Shenzhen composite was largely flat at 1,531.86. South Korea’s Kospi rose 0.14% to end the trading week at 2,041.74. In Hong Kong, the Hang Seng index shed earlier gains to slip around 0.7%, as of its final hour of trading. Oil was on track for its biggest monthly drop in six months on Friday as U.S. President Donald Trump ramped up trade tensions, weighing on the demand outlook. Brent futures are heading for an 11% slide in May and WTI for a 13% drop, their biggest monthly losses since November. Front-month Brent crude futures, the international benchmark for oil prices, were at $64.91 at 1116 GMT, down $1.96 from last session’s close. U.S. West Texas Intermediate (WTI) crude futures were at $55.31 per barrel, down $1.28 from their last settlement. Both grades earlier hit their lowest since March 8. Gold prices rose on Friday, heading towards their first monthly gain since January on increased safe-haven demand, after U.S. President Donald Trump vowed to levy tariffs on all imports from Mexico, ratcheting up concerns of a global economic slowdown. The new threat of tariffs on Mexico, coupled with a string of soggy economic data from the United States this month and the long-drawn Sino-U.S. trade war, also translated into increased bets that the U.S. Federal Reserve could cut interest rates this year. Spot gold was up 0.5% at $1,294.72 per ounce at 0711 GMT. It has risen about 0.9% so far this month. The metal is also on track for a second consecutive weekly gain, up about 0.8% over the week. U.S. gold futures rose 0.6% to $1,294.70 an ounce.